Self-directed IRAs provide countless investment opportunities for investors, but don’t get fooled into thinking all investments make sense for IRAs. More and more you hear about people buying or starting businesses with an IRA, but does business activity even make sense in an IRA? Investments like tax liens, rental properties, notes, raw land, securities, mutual funds, commercial properties, etc. are all “passive” investments and, as a result, get a tax-deferred treatment inside an IRA. Although an IRA is a “tax deferred” account, you can still pay taxes if the investment is not passive, but business activity. In fact, a “non-passive” investment inside an IRA can trigger taxes as high as 35% as a result of the trust tax associated with Unrelated Business Taxible Income (UBTI). In addition to tax consequences, business ownership in an IRA is very restrictive because of the rules that govern IRAs.
Companies like Guidant Financial Group that provide self-directed IRA products, use a very different retirement vehicle for business activity or business ownership. These structures utilize a self directed 401k, rather than an IRA which is much more favorable from a tax perspective and give the 401k owner much more legal freedom to run their business.
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